China's largest covid outbreak is hampering economic growth
- China's largest covid outbreak since the beginning of the pandemic in late 2019 is hampering tourism and spending during peak summer holiday, prompting analysts to review their economic growth projections as risks escalate.
Authorities rushed to cancel tourist sites, call off cultural events and close flights, as the outbreak linked to the highly-infectious delta variant spread within just two weeks to nearly half of China's 32 provinces. At least 46 cities have told residents to refrain from traveling unless it is absolutely necessary.
Alongside recent flooding in parts of the country, the latest virus controls will likely curb retail spending and economic growth in the second half of the year.
Nomura Holdings Inc. reduces its projection for third quarter growth to 5.1% from 6.4% previously and sees 4.4% expansion in the last three months of the year, down from 5.3%. For the full year, Nomura cut its GDP forecast to 8.2% from 8.9%.
'The draconian measures taken by the government are potentially result in the most stringent travel bans and lockdowns in China since the Spring of 2020, said Lu Ting, Nomura's chief economist for China. 'Recent rainstorms and flooding - both worse than anticipated - necessitate a downward adjustment to our GDP growth forecast for the third quarter.
Goldman Sachs Group Inc. said the potential impact on third-quarter growth could be 0.7 percentage points, although it didn't lower its 6.2% growth forecast for the quarter, saying there are uncertainties about the duration of the outbreak and likely stronger policy support. Natwest Group Plc and Bloomberg Economics. also see downside risk to their growth forecasts.
Even though the past year has faced sporadic virus flare-ups in China, they have been much smaller in scope and quickly contained. The current outbreak has closed all tourist sites in Zhangjiajie, a charming scenic destination in central China. Other cities in the provinces of Hunan, Jiangsu and Shanxi are also closed tourist locations.
AIRLINES scheduled 9.8% less seat capacity in China this week than last week, the second drop in a row based on data from scheduling specialist OAG. Capacity now stands at 95.7% of 2019 levels. It is the first time in five weeks that carrier has offered fewer seats in the country than they did in comparable pre-pandemic period.
Hotel and flight reservation site Qunar.com Inc. told passengers on 29 July that cancellations increased to four times the amount seen in normal days, and customer inquiries also soared to three times the usual amount.
'Resident' wage growth was already lagging, and if they can't spend their money due to the outbreak it will surely be a drag on consumption in the second half of the year, said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.
The current outbreak adds to a fragile recovery in retail sales and weighs on a number of risks that analysts already see in the second half, including a slowdown in exports and cooling property and infrastructure investment.
Purchasing managers surveys in July show manufacturing coming under pressure in the month. And even though Caixin services PMI rebounded sharply from a 14 month low in June - largely because a previous outbreak in the southern province of Guangdong was brought under control, the outlook remains negative.
The indicators on the economy suggest that the economic recovery is not on a sure footing, Wang Zhe, senior economist in Caixin Insight Group, said in a statement Wednesday. 'The economy faces enormous downward pressure still.
Beijing has been trying to make consumption in the economy to make it less dependent on old growth drivers like investment and property. That remains a key focus for authorities, with the official China Securities Journal newspaper saying in a front-page commentary on Wednesday that the country should prioritize expanding the domestic market to stabilize growth and counter uncertainties in overseas demand.
Bloomberg Economics estimates retail sales could contract about 0.2% month-on-month in July and August, similar to the impact shown during outbreaks at the beginning of the year in Hebei and Jilin provinces. For the year as a whole, retail sales growth will likely fall short of a previous projection of 12%.
Authorities are already on the guard for slower growth in the coming months and have pledged fiscal and monetary support to cushion the recovery. The government has increased GDP growth of more than 6% in this year.
Traders are raising bets for monetary easing, with bond yields and an indicator of future rates at one-year lows both. The rally in the sovereign debt follows seven consecutive weeks of gains, the longest winning streak since the trade war with the U.S. broke out in 2018.
The benchmark 10 year yield has fallen nearly 45 basis points from its February high, bolstered by local inflows and a delay in foreign bond issuance. Bonds have been also triggered by stock demand that was driven by a sell-off in shares.
Production has been spared a nationwide lockdown of the sort which slammed the economy in early 2020. Even so, the chances of another reserve requirement ratio cut to cushion the blow to the economy are increasing - and consumption could use a little such insurance as well.
The latest outbreak has spread to Beijing despite the capital city's stringent measures, with authorities taking steps Tuesday to ban passengers from 23 regions, including Zhengzhou, Nanjing, Yangzhou, Shenyang and Dalian. The financial hub of Shanghai reported a virus case earlier this week.
Several tourist events have been postponed or cancelled, including the Qingdao International Beer Festival, China's largest beer festival, and the Torch Festival in Yunnan province in southern China. More than a dozen music festivals in various cities have also been called off or delayed and the cinemas were closed in Nanjing, Zhangjiajie and Lianyungang.
Cases have not been found in areas with heavy export or industrial activities so far, which means the impact on production should be limited, said Iris Pang, chief economic officer for ING Bank NV in Greater China.
'If there are cases in new locations where there are major cities of services or manufacturing, then it would affect economic activity, she said.